What is the function of a cartel?

The function of a cartel is to restrict output to increase joint profits. Cartels are formal agreements among competing firms in an industry to coordinate their production and pricing decisions. By limiting the quantity of goods produced, they aim to create artificial scarcity in the market, which helps drive up prices.

This collaborative effort allows cartel members to share the increased profits, as their coordinated actions lead to higher prices than would be achievable in a competitive market where individual firms act independently. The goal is to maximize the members' collective profits rather than engaging in competition that would typically drive prices down and reduce profits.

In contrast, encouraging free market competition and increasing output to meet demand would not align with the primary objectives of a cartel. Similarly, setting prices based on market demand would imply that firms are responding to competitive pressures rather than working together to manipulate the market for their benefit. Thus, the defining characteristic of a cartel is its focus on output restriction to enhance profitability.